Clean Growth: How can we improve business energy efficiency?

July 18, 2017

UK energy policy is often framed as a trilemma of objectives – security of supply, affordability and sustainability. Improving energy efficiency within houses, businesses and the public sector presents a large and often overlooked opportunity to tackle all aspects of the trilemma.

Policy Exchange is launching a new project looking at the opportunities and barriers to boosting business energy efficiency. Despite a compelling case, widespread adoption of energy efficiency measures are yet to materialise and policies to deliver this need serious consideration. Our new project, Clean Growth, will seek to identify ways to overcome the barriers to energy efficiency investment.

Why Business Energy Efficiency?

Improving energy efficiency is amongst the easiest and cheapest ways to decarbonise our energy system as identified in our report, The Customer is Always Right. This applies to households and businesses, and to electricity and other forms of energy. Whilst carbon prices and low carbon subsidies tend to raise energy costs for end users, improving energy efficiency and cutting energy usage can reduce energy bills – a particularly hot subject indeed, reflected by the current rhetoric and furore around price caps.

So how big is the scope for energy efficiency and how quickly can businesses recoup their costs? The BEES survey suggests that there is still significant potential to improve energy efficiency within businesses by a further 39%. One third of the identified savings relate to measures which have a payback period of 3 years or less. The main identifiable savings relate to lighting, energy management and controls, and space heating.

Implementing these energy saving measures would not only result in a reduction in greenhouse gas emissions, but also improve the productivity of firms due to cost savings. The total-spend on energy by ‘Industrial sectors’ and ‘Other Sectors’ (comprising of agriculture, commercial, transport, and public) in the UK is £22.5 billion (comprising £4.5 billion on gas and £18 billion on electricity) (Ref).  Overall this represents nearly 5% of GDP, and clearly, a large market to go after.

The need to cut bills is crucial in order to maintain UK competitiveness and reduce barriers to growth- a view championed vociferously by industry voices. As it stands, average UK industrial electricity prices (excluding taxes) are second highest in the IEA and G7, and 63 per cent above the IEA median (Ref).

The identified measures with a less than 3 year payback would result in bill savings of £1.3 billion per year in total. As such, making improvements in energy efficiency could contribute not only to the Government’s decarbonisation agenda but also its Emissions Reduction Plan and Industrial Strategy. The latter certainly supported this in its recent green paper.

Yet progress to date to reduce emissions has been quite mixed across sectors of the UK economy. There has been significant progress to reduce emissions from the industrial sector, which have fallen by 53% since 1970, whilst at the same time, emissions from the service sector businesses grew by 15%. Superficially at least, it appears that great strides in industrial energy efficiency have been made, but this is not the full picture.

The improvement in industrial emissions is in fact due to structural changes within the UK economy, in particular the declining significance of industrial output and employment compared with the increasing importance of the service sector. Consequently, the total amount of energy consumed in service sectors actually increased. Improving energy efficiency also has potential to reduce energy import dependence and thus, increase energy security. But since 2004, the UK has become a net importer of energy, and reliance on imported energy has returned to the levels last seen around the mid-to late-1970s (Ref).

With such a compelling case for improving energy efficiency, a pertinent question to ask is – what is holding back investment?

Investment Barriers

A previous Policy Exchange report highlighted a number of barriers and market failures holding back investment in energy efficiency, namely financial barriers, hidden costs/risks, informational barriers, misaligned incentives, and behavioural barriers.

Government research shows that the barriers most frequently cited by businesses are capital availability, competing priorities, and a lack of time; whilst the most impactful barriers are seen as divergent interests, split incentives, insufficiently financial return from investment, complexity, and capital availability. The barriers to energy efficiency investment are quite nuanced, and vary according to the sector and size of the business.

However there are some apparent anomalies: whilst businesses often identify capital constraints as a barrier to investment in energy efficiency, banks and other finance providers often identify a shortage of bankable projects as the barrier to investment in energy efficiency. This may be in part due to unwillingness on both parts to invest the time and money to identify and develop energy efficiency projects to the point of investment readiness. As such, what appears to result is a piecemeal and incremental approach whereby some businesses take small steps to improve energy efficiency, but larger scale, more transformational projects are frequently overlooked. This break down in the flow of projects may in part be due to a lack of ‘developers’ of energy efficiency projects (e.g. by contrast there are many companies who actively develop renewable energy projects).

Despite policymakers actively considering what to do next, there is still a need for significant thinking to progress from the generic barriers identified to some concrete policy recommendations.

This is precisely where we plan to focus our work over the next few weeks and months – undertaking a new project, entitled Clean Growth. As part of this work we will be holding a roundtable this Friday 21st July, involving energy users and businesses offering energy efficiency products and services. If you are interested in attending the roundtable or engaging with us further regarding this project then please contact:

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